Norway’s covered bond market has grown to about 780 billion
kroner ($137 billion) from less than 100 billion kroner in 2007
and makes up about 20 percent of the banks’ funding, the
Financial Supervisory Authority said.

“What we fear is that extensive use of covered bonds could
inherently increase the vulnerability of the financing structure
of the banks over time,” Director General Morten Baltzersen
said today in an interview. “At this stage after the rapid
growth of the instrument we should consider possible
limitations.”

Banks may have difficulty obtaining unsecured funding as
investors shun higher-risk financing in favour of covered bonds,
according to the regulator. The use of mortgage loans to secure
the bonds also provides less high-quality assets to backstop the
banks’ other types of financing. The low funding costs of
covered bonds risk drawing away funding from other areas.

“There are reasons to be prudent as to the future use of
these instruments,” Baltzersen said. “This is a concern that
we share with most financial supervisory authorities in
Europe.”

Any introduction of general restrictions would be designed
not to “undermine” the established covered bond market,
according to the FSA. The regulator said that consideration
should be given to introducing limits on the proportion of
assets that can be posted as collateral for covered bonds.

Overall, the banks are “solid and profitable,” the
regulator said in a report, adding that the trend of rising
house prices and household debt continues to be a cause for
concern. The regulator also said it would seek to curb the
increased use of covered bonds to finance mortgage lending,
according to a report today.